Real Estate Commission Practices Under Legal Scrutiny

Image Commercially Licensed from: Depositphotos
Image Commercially Licensed from: Depositphotos

The real estate industry’s longstanding commission practices are currently under legal examination. A Kansas City jury recently ruled against the National Association of Realtors and several real estate brokerages, finding them guilty of conspiring to keep commission rates high. The defendants, who plan to appeal, face a substantial financial penalty, which could reach $1.8 billion, affecting around half a million home sellers in Missouri. This legal decision has the potential to revolutionize the payment structure for real estate agents and the process of selling homes.

Understanding the current commission system is essential to grasp the potential changes. Sellers typically pay a commission, which is then divided between the agents representing both the seller and the buyer. This practice has been the norm for over five decades. The commission is usually between 5 to 6 percent of the sale price, meaning both agents would share approximately $30,000 from a $500,000 sale.

The lawsuit challenges the mandatory coupling of commissions, which some argue unfairly obliges sellers to pay both agents, even if they wish to exclude the buyer’s agent. This coupling is enforced through the multiple listing service (MLS), a crucial tool for property visibility. Without MLS listing, a property is significantly less visible to potential buyers.

The internet has transformed how people search for homes, reducing the need for agents in some aspects, yet commission rates have not adapted to this shift. Additionally, the uniformity of commission rates, regardless of the complexity of the transaction, is seen as problematic by some economists.

Bright MLS spokesperson Christy Reap argues that the current system prevents bias and ensures fairness among agents. Altering this system could lead to a competitive disadvantage for those who do not adhere to the standard commission split. Moreover, requiring buyers to contribute to commissions could financially burden them, adding to the already significant costs of purchasing a home.

While sellers can negotiate lower commissions, the fear of being less attractive to buyers’ agents often deters them. Evidence suggests that higher commission rates are more enticing to buyers’ agents.

Redfin operates on a different model, offering lower listing fees instead of traditional commissions. This is possible because Redfin employs its agents, providing them with a base salary and transaction bonuses. However, other brokerages offering lower commissions have struggled to gain market traction.

The recent legal verdict won’t immediately affect home sellers, but it could prompt brokerages to reconsider their commission structures to avoid similar legal challenges. The industry might see a shift towards buyers paying their agents directly or the possibility of dual agency, where one agent represents both buyer and seller, as practiced in other countries.

The decoupling of buyer and seller commissions could lead to a more competitive market with varied agent services and potentially lower house prices. However, this could also result in agents specializing in certain markets or client types, which could inadvertently lead to discrimination.

The future of the real estate industry remains uncertain, with potential changes hinging on the final outcome of the legal proceedings and the industry’s response to the verdict.